Yen Weakens in Choppy Trading, Stocks Mixed as BOJ Holds Rates

Japanese 10000 yen banknotes. Photo by Toru Hanai /Bloomberg

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(Bloomberg) — The yen reversed gains and weakened after the Bank of Japan left its benchmark interest rate unchanged. Stocks were mixed, with the Topix index holding a small advance while the Nikkei 225 declined.

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Japanese assets were also caught in choppy trading across global markets as US President Donald Trump and Chinese President Xi Jinping wrapped up their highly-anticipated summit in South Korea. 

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BOJ board members Naoki Tamura and Hajime Takata voted against the decision for a second consecutive meeting. Investor focus now turns to Governor Kazuo Ueda’s press conference at 3:30pm for clues on the timing of the next move, as elevated inflation and persistent yen weakness continue to build pressure for action.

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Japan’s currency dropped as much as 0.3% against the dollar to 153.14 and bond futures rose following the decision that was expected by 90% of economists surveyed by Bloomberg. 

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“Overall, it seems like the BOJ board consensus is still geared towards a cautious and careful approach to policy normalization, despite the hawkish dissenters Tamura and Takata,” said Felix Ryan, a strategist at ANZ Group Holdings Ltd. in Sydney. “The messaging from Governor Ueda later today will be key, but it seems likely that he will stress a data-dependent and careful view on further rate hikes.”

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The yen has fallen more than 3% against the greenback this month, underperforming all of its G-10 peers, as markets price in Prime Minister Sanae Takaichi’s tilt toward easy monetary policy and fiscal expansion. That backdrop is seen complicating the BOJ’s policy path, while a key price measure picked up pace on higher energy costs, keeping the central bank on track for further rate hikes.

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“No doubt Ueda will get asked about the BOJ’s communication with the new Takaichi administration, which leans dovish on monetary policy,” said Carol Kong, strategist at Commonwealth Bank of Australia in Sydney. 

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“Ueda will give stronger signals of a hike only if he has gotten the greenlight from the government,” she said. “Otherwise, he will likely stick to the script and repeat the view that the BOJ will only raise the policy rate if the outlook is realized.”

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Overnight index swaps suggest traders are pricing in about a 50% chance of a rate hike by December, and around a 87% chance by January.

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In its latest quarterly economic outlook report, the BOJ revised its growth forecast for the current fiscal year to 0.7% from 0.6% in the previous projection. The central bank also noted that the consumer price index is likely to decelerate below 2% next year, while keeping its view that underlying inflation will meet its goal in the second half of the BOJ’s three-year projection period through early 2028.

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“The decision — with the same two dissenters as September, CPI expected to fall below 2% next year and a modest GDP upgrade — reinforces the view that policy normalization will be slow and cautious,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. “To prevent the yen from weakening further, Ueda may need to balance this decision with a bit of a hawkish tone.”